Consultation outcome

Guidance on UKEF's approach to foreign content

Published 3 April 2019

UKEF helps UK companies of all sizes and in all sectors to export by enabling them to win business, perform contracts and get paid through a variety of guarantee, lending and insurance products.

UKEF’s policy on Foreign Content is derived from 2 public consultations, held in 2007 and 2019, and takes a Principles-based approach to Foreign Content. This guidance describes the Principles by which UKEF will assess Foreign Content in transactions it supports.

1. What is Foreign Content?

UKEF’s definition of Foreign Content in a contract is the cost of purchasing from outside the UK any goods, services and intangible assets supplied under that contract. UK Content can therefore be defined as total contract value minus Foreign Content.

Goods produced in another country which are processed or modified within the UK, and which are eligible for a UK country of origin certificate are not classified as Foreign Content. Intangible assets originating in the UK, where no Certificate of Origin is available, will also not be treated as Foreign Content.

The definitions outlined above apply in standard contractual structures ie a UK exporter directly contracting with an overseas buyer. Where this is not the case, UKEF will apply its definitions as set out in the 2019 Consultation Response.

2. Why does UKEF include Foreign Content in its cover?

UKEF’s support for Foreign Content in transactions recognises the global nature of modern supply chains and the nature of the UK economy, which includes some of the world’s leading service (including design and engineering) companies. This contribution may form a relatively small proportion of the overall contract value but still represents significant business for UK exporters that, in the absence of UKEF support, may be placed in other countries.

The flexibility of UKEF’s Foreign Content policy has played a significant role in encouraging overseas buyers to source goods and services from the UK. It can also incentivise prime contractors to source more from the UK to streamline their financing requirements by utilising UKEF support.

3. How are the Principles applied to applications?

Each of the Principles is assessed individually and in turn to determine whether a transaction meets UKEF’s Foreign Content policy criteria, alongside other factors for consideration (such as credit risk, environmental social and human rights impacts and anti-bribery and corruption matters).

Applications are assessed initially against Principle One. If a transaction cannot be supported under Principle One, UKEF may provide support on the basis of Principle Two. If not meeting the requirements of Principle Two, UKEF may consider providing support under Principle Three.

4. Principle One

The maximum level of support for all Foreign Content is 80% of the contract value, thus requiring a minimum 20% UK Content.

5. Principle Two

The proportions of Foreign Content to UK Content set out in Principle One (the current 80:20 rule) will apply to the value of UKEF’s support of a contract or a project, which may consist of multiple contracts.

In practice, UKEF can base the amount of support provided on the level of UK Content in that contract if it is under 20% (Example A) or can take account of UK content contained in a related project or related current, past or prospective contracts (Example B).

6. Principle Three

UKEF may provide support if it can be demonstrated that the proposal is conducive to supporting or developing UK exports.

When providing support under this Principle, UKEF may impose additional measures, such as incentivisation mechanisms, whereby the level of support available from UKEF will be directly linked to current or future supply chain spend or commitments made by the applicant, which are conducive to UK exports.

Examples of this could include increasing future production in the UK, increasing the value or proportion of spend in the UK supply chain in the future, or increasing the number of jobs created in the UK in the future.

A decision under this principle will involve a statement by the applicant justifying the application of this Principle, which in UKEF’s determination justifies UKEF’s provision of support.

It is unlikely that one single aspect is a decisive factor in determining the provision of UKEF support under Principle Three. It is more likely that there is combination of factors which when viewed holistically provide conclusive reasons for UKEF to provide support linked to UK exports.

Therefore, UKEF is unable to provide a single set of objective criteria in advance.

However, the justification is likely centre upon the beneficial impact to UK exports and the development of UK suppliers in global supply chains.

Example A – Principle Two

A UK exporter has a contract with an overseas buyer worth £100m, containing £10m UK content.

UKEF could consider providing up to £50m of support to reflect the level of UK goods and services in the contract (up to 5 times the value of UK content). Considering UKEF would normally support no more than 85% of a contract, this may mean maximum support available for contractual amounts is capped at £42.5m.

The outstanding proportion of the contract could be financed in a variety of ways, for example, by equity investment, by the support of another Export Credit Agency or by uncovered commercial lending or similar.

Example B – Principle Two

There are 2 contracts that are supporting an overall project, but which are not contractually linked.

The first contract, consisting of design, project management, engineering etc, has £19 million of UK Content and a contract value of £20 million. This contract is being funded by commercial financing. The second contract has UK Content of £1 million but a larger contract value of £100 million. This contract is experiencing greater difficulties in obtaining commercial financing due to its complexity and size. Without financing for the second contract the project would not go ahead putting the total £20 million of UK content at risk.

UKEF would consider providing support for all or a proportion of the second contract on the basis that it would be conducive to UK supply in the first contract and proportional to the total level of UK goods and services within the overall project.

Example C – Principle Three

A company operating in multiple sectors, has a significant UK supply chain, with research facilities, manufacturing facilities and employees based in the UK.

Due to modern and complex manufacturing methods, the UK involvement in the company’s export contracts is spread throughout the supply chain. This means under Principle One and Principle Two, UKEF would be unable to recognise the full extent of the UK value added.

In order to access UKEF support, the company is willing to increase the level of spend with the UK supply chain. Under Principle Three, UKEF may be able to provide an amount of support for the company’s export contracts (that do not in themselves meet Principle One or Principle Two) in proportion to the UK supply chain spend, supporting the development of future exports.

7. How to use the new Foreign Content policy

UKEF’s application forms will be updated to enable applicants to outline the basis on which they wish UKEF to consider their request for support.

Enquiries

In the event of any further questions, interested parties should contact UKEF on [email protected] to discuss any queries with a member of UKEF’s customer service, business development or underwriting teams.